International Trade &

Globalization
Chapter 10
 GLOBALIZATION

• Globalization is the term used to

convey the idea that international
factors are becoming a more
important part of the world economy
• The simplest measure of globalization
is the ratio of exports to GDP
– Countries with a high ratio of exports to
GDP are generally more open to the
world economy than countries with a
low ratio
 GLOBALIZATION

• Globalization or the increasing

openness of an economy, means
changes that are not universally
positive
• Globalization involves not only the
goods and service but the movement
of people and money as well
• International transactions occur
because both parties expect the
transaction to improve their
Resource Distribution

• The factors of production are not evenly

distributed throughout the world
– Natural resources are more plentiful in some areas
(Oil & gas deposits, water, timber)
– Human capital is more skilled in nations with higher
literacy rates
– Physical capital is deeper in some nations
• Better machinery
• Better infrastructure allows for goods to be transported easier
on new roads, bridges, etc.
Resource Distribution

• The unequal distribution of resources

encourages nations to specialize
– The availability of resources differs greatly
from country to country
• Although some countries could be self
sufficient, it is to their advantage to
specialize in certain areas
– Ex: U.K. has double the airports as Peru
despite being much smaller in size
Absolute and Comparative
Advantage

• Absolute advantage...when one nation can

produce a good at a lower cost than another
(must decide what to produce)
• Comparative advantage...the ability for a
nation to produce at a lower opportunity cost
– Presented by David Ricardo
– The nation with the lowest opportunity cost should
specialize in that product
• Known as the law of comparative advantage
• Nations will make more $$ selling their specific good
International Trade

• Since countries may have a comparative

advantage over others, it makes sense for
them to trade
– Whichever nation has comparative advantage
should specialize in the production of that
good
• The US and trade
– The US is the 2nd largest importer of goods
behind the European Union
rd
US Exports

• 3rd Largest after China & E.U.

• U.S. used be the largest exporter in the
world
– We used to export goods such as: comp
software, medical equip, other advanced
technology at a very high rate
• Exportation of services is becoming greater
in the global economy
US Imports

• 2nd Largest behind the E.U.

• The US imports nearly $2.3 trillion in
goods and services annually
• In total, we import more than we export
• Why do we import so many goods and
services?
Trade on Employment

• International trade has caused many

changes and trends in employment
• Due to comparative advantage,
workers need to gain certain skills in order
to find employment
– Ex: Japanese cars might be priced lower
because of machines doing the work and not
people. US car companies have been forced to
lay off many people
Free Trade?

• Many people argue that governments

should regulate trade in order to protect
industries and jobs from foreign
competition
– This is known as protectionism
• Many nations set up trade barriers in order
to provide protectionism
– Gov’ts want to protect their companies from
foreign competition
Trade Barriers

• Trade barriers...restrictions that prevent

foreign products or services from freely
entering a country
– Import quotas...limits on the amount that
can be imported (US limits the amount of raw
cotton coming in)
– Voluntary Export Restraints...self imposed
export restraint (hopes to avoid import
quotas) – done to prevent binding trade
barriers
Trade Barriers

• Tariffs...taxes on imported goods

– Customs duty (tax on goods from abroad)
– Used to encourage purchasing of domestic
products
• Other Trade Barriers (Informal)
– Licenses
• High fees or slow processing will act as barriers
– Standards of production
• Banning of goods produced bec of certain methods
Effects of Trade Barriers

• Increased prices for foreign goods

– $20,000 USA made car or $22,000 foreign
made car bec of a tariff?
• Trade barriers will limit supply
• Trade Wars will take place
– When countries institute restrictions on each
other
– Usually leads to poor trade for both countries
Arguments for Protectionism

• Protects jobs…protecting domestic

industry will protect jobs
– We want to protect markets that have
comparative advantage
• Protects infant industries
– Helps to reduce competition and barriers for
certain start up industries
– Protects national security…reduces
dependence on foreign nations/products
International Trade
Agreements

• Recent trends are encouraging free trade

– Raises living standards
– Encourages world peace
– Many free trade agreements have been
established
– International Free Trade Agreements
• Cooperation of two or more countries to reduce
trade barriers (will reduce conflict)
World Trade Organization

• GATT...General Agreement on Tariffs and

Trade...founded in 1948
– Reduce tariffs & expand world trade
• WTO…World Trade Organization
worldwide organization whose goal is freer
global trade and lower tariffs - founded in
1995 to ensure GATT
– Acts as a referee for trade agreements
– Will negotiate new trade agreements
Free Trade Zones

• Areas established by countries to reduce or

eliminate trade barriers
• Two such Organizations
– European Union (EU) (1957)
• Set up to market & coordinate trade policies
• “Euro” is used in all 28 countries
– North American Free Trade Agreement
(NAFTA)
• Eliminates trade barriers in Canada, Mexico & USA
European Union

• Regional trade organization made up of 28

member nations
• Essentially developed a single market
(EEC...European Economic Community) in
Europe (trades w/USA A LOT!)
– EU has a parliament, a flag, a council, an anthem, and
currency (the euro)
• Goal is to create a single economy that rivals the
US
– Currently the largest trading partner of the US
• Canada, Mexico, and Japan are next
NAFTA

• Created to eliminate all tariffs and barriers

in the region (Canada, Mexico, US) –
ratified in 1994
– Largest free trade zone in world
• Although there has been much
controversy, NAFTA has increased trade
between the three nations
– Today, NAFTA is working to expand to other
countries in Western Hemisphere
 Strength of Currency
• Appreciation...increase in the value of
currency: “a strong dollar”
– When a currency appreciates, exports decline
(US goods are more expensive)
• Products are more expensive in other nations
• Depreciation...decrease in the value of
currency: “weak dollar”
– When a currency depreciates, exports rise and
imports decrease
• Other nations’ products are more expensive here in
the USA
Exchange Rate Systems

• Fixed Exchange Rate System 

governments try to keep their currency constant
with one another
– Requires countries to keep similar economic systems-
should be plus or minus 2% of center
– Ex: The euro for the EU
• Flexible Exchange Rate System  exchange
rate is determined by supply and demand and it
fluctuates
– Used by most major currencies today
– Accounts for day to day changes in value